Thursday, September 5, 2013

Are Entrepreneurs Born Or Made?

A new NBER working paper explores this and many other questions (abstract; emphasis added):

Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?
Ross Levine, Yona Rubinstein

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. The incorporated self-employed have a distinct combination of cognitive, noncognitive, and family traits. Besides coming from higher-income families with better-educated mothers, the incorporated—as teenagers—scored higher on learning aptitude tests, had greater self-esteem, and engaged in more aggressive, illicit, risk-taking activities. The combination of “smarts” and “aggressive/illicit/risk-taking” tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to a large literature, we also find that entrepreneurs earn much more per hour than their salaried counterparts.

The paper departs from the existing literature by subdividing self-employed workers from those who use a limited liability corporate structure and those that do not. The idea is that “true” entrepreneurs – those who engage in risky, innovative activities tend to prefer a formal business structure which isolate shareholder and management risk.

Part of the motivation for this approach is that prior studies, which used aggregated data, found that lifetime earnings for the self-employed were lower than that of salaried workers of similar characteristics i.e. entrepreneurship doesn’t pay.

What this study found was that the low-returns of the self-employed is largely due to a skewed distribution, with many more low-income “unincorporated” self-employed compared than high-income “incorporated” self-employed.

Additionally, it was found that high-income entrepreneurs were typically successful salaried workers before starting off on their own, and that the switch caused their incomes to jump higher – around 18% more, and as much as 70% more at the top of the distribution i.e. successful high salaried workers gained more from starting their own business.

Even more interesting, successful entrepreneurs tended to have certain characteristics, as outlined in the abstract above – high learning aptitude and self esteem (but not necessarily highly educated); from stable, higher income families with better educated mothers; and a propensity to break the rules. In the latter, breaking the rules covers everything from drug taking and vandalism, to armed robbery – successful entrepreneurs are three times more likely to have been involved with something illegal in their youth.

A few lessons spring to mind from this:

  1. Can entrepreneurship be taught? Despite many efforts in this direction, both here in Malaysia and in many advanced economies, the study findings suggest not. Entrepreneurs are born not made, though nurturing is probably helpful.
  2. Further, government efforts to support entrepreneurs from the “ground” up are likely wasted – the focus should be on nurturing the right cognitive and non-cognitive traits required throughout the early education system, not in through post-secondary education and assistance. By the time interventions such as the latter are taken, it’s probably too late. Useful for those who can access them, but too late nonetheless.
  3. Our education system, which values conformity, probably works against creating a pool of budding entrepreneurs. Breaking the rules is not regarded as an endearing trait in Malaysia. One wonders about the mass of criminals and the prevalence of antisocial behaviour – could that be an indicator of wasted entrepreneurship material that we have ignored?

Food for thought.

Technical Notes

Levine, Ross and Yona Rubinstein, "Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?", NBER Working Paper No. 19276, August 2013

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